FIN 620 This report is intended for educational purposes only.

Industry: Chemicals Plastics & Resins

Ticker: POL [NYSE] Price: $15.74 (7/1/11) Earnings/Share

1Q 2009 A 2010 A 2011 E 2012 E 2013 E 0.09 0.19 1.14 1.17 1.36 2Q 0.04 0.47 0.28 1.23 1.39 3Q 0.53 0.21 0.28 1.26 1.41

Recommendation: BUY Price Target: $21.74 (12/31/11)

4Q 0.25 1.02 1.13 1.33 1.45

Year 0.73 1.89 1.13 -----

P/E 5.8 5.5 19.2 -----

Highlights
y PolyOne has successfully restructured for future growth. Selling off excess assets in the USA allowed PolyOne to raise capital and reinvest it in emerging overseas markets. This makes them the only compounding firm with a presence in every major market. Plastic processors continue to relocate operations to emerging markets with inexpensive labor while leaving R&D and corporate functions in Europe and North America. PolyOne s structure provides them the unique competitive advantage of being a local supplier in most major markets. The P/E, PEG, ROA, ROE and operating margins indicate that PolyOne is a top performer in the industry with significant upside potential.

One Year Price Movement & Volume1

Google Inc. (2011). NYSE:POL: Retrieved July 1, 2011, from Google Finance: http://www.google.com/finance?q=POL

Investment Summary
The customer base for Compounding companies has undergone a significant geographic shift in recent years. It is estimated that as much as 40% of them have relocated operations from North America and Europe and moved them to Asia2. The 2008 recession forced the compounding industry to address the excess capacity in Western markets. Most firms reacted to lost business by simply downsizing. PolyOne sold off or closed excess capacity in the West and followed their customers by building or acquiring operations in Asia and South America. In 2008 and 2009 much of PolyOne s profits came from their emerging nation investments3. PolyOne pays an annual $0.16 dividend per share as of Q1 2011. While this is not a bullish sign for growth, it does indicate that the company is maturing. This may represent a more stable long term growth opportunity. The P/E ratio is 6.09 which is currently below the industry average of 18.09. This is a bullish sign for PolyOne stock indicating that the stock is undervalued. Similarly the stock s PEG ratio is 0.49 which is below the industry average of 2.36, another sign that the stock is undervalued. PolyOne has an above average operating margin of 6.65% compared to its peers average of 3.55% indicating that PolyOne is a more efficient operation. PolyOne also has a 51.59% ROE which is significantly higher than the industry average of 13.81% and an ROA of 15.44% which is higher than the industry average of 1.8%. These ratios further indicate that PolyOne is more efficient than its competitors.

Valuation
We valued PolyOne Corporation using the free cash flow and comparable company analysis. We used an equal weighted average to arrive at the target price projection estimate for December 31, 2011. The price target that resulted for the analysis was $21.74, which has an expected return of approximately 38%.
2 3

Bregar, B. (2009, March 16). What will the next 20 years bring? Plastics News. Esposito, F. (2010, February). PolyOne finds growth in Asia. Plastics News.

Target Price Analysis Valuation Method Free Cash Flow Model Comparable Company Analysis Share Price $ $ 22.25 21.24 Weight 50% 50%

Target Price Return Estimated Target Price 12/31/11 Current Price 7/1/11 Expected Return $ $ 21.74 15.74 38%

Free Cash Flow Model Revenue. We expect the revenue for 2011 to grow significantly as PolyOne just acquired a Brazilian company, Polimaster, in 2010. We predict the revenue will grow at a slower rate for 2012 and 2013. The growth rate is projected to be 15% in 2011 and then approximately 9% for the following two years. Net Income. The projected net income figures seem low for years 2011 through 2013 when compared to that of 2010 (see Appendix C); however, the figure from 2010 is after a $50 million tax benefit that was an effect of a tax valuation allowance reversal. Prior to the income taxes portion, the income for 2011 through 2013 does increase significantly. The net income does revisit the same approximate levels as 2010 by 2013 when comparing the income after taxes. Assets. After the Brazilian acquisition and the extinguishment of $40 million in debt, PolyOne s cash position will decrease in 2011 (see Appendix D). The inventory will increase due to the added inventory that PolyOne will obtain from Polimaster s balance sheet. The property, plant and equipment will increase as a result of new facilities, machines, etc.

Resulting Price. We computed the terminal value in 2013 to be approximately $2.6 billion. We used the perpetual growth model and assumed a 2.5% perpetual growth rate. With an equity value of $1.7 billion, 93.4 million shares outstanding, and required return on equity of 20.85% - the resulting price target is $22.25. Comparable Company Analysis The second valuation approach is a comparable company analysis. We evaluated PolyOne Corporation relative to its major competitors in the industry Spartech (SEH), A. Schulman (SHLM), Ferro (FOE), and Georgia Gulf (GGC). We decided to use the data from the years 2010, 2007, and 2006 for the analysis instead of using 2010, 2009, and 2008 because that data contained outliers which skewed the results of the examination. In the years 2008 and 2009 many companies endured large downsizes, and in some cases, production was halted all together. This resulted in a loss for most companies in the industry and thus created a P/E of zero. According to the P/E analysis, the industry had a range of P/Es from 10 to 25. The projected P/E for PolyOne based on the companies used had a mid-point of 18.5. The target price that resulted from the analysis ranged from $14 to $29 per share, with a mid-point of $21.24.

Business Description: Polymers & Plastics

PolyOne was formed in 2000 by a merger of The Geon Company and M. A. Hanna. The business is incorporated in Ohio with global headquarters located in Avon Lake. In 2010 PolyOne employed approximately 4,000 people at 54 locations across the globe. International growth has been a steady focus for the company since its formation and currently 34% of its revenues come from customers in Asia, Europe and South America. PolyOne s product lines are based on combining polymers, additives and colorants into custom compounds for processors in the plastic industry. These products allow injection molding, blow molding and sheet extruder companies to buy a single product that has been formulated to meet the specific performance and appearance needs of their application.

There are five major segments of the PolyOne business: custom engineering compounds, color and additives concentrates, performance products (PVC compounds), resin distribution and Sunbelt (50:50 venture with Olin Corporation for PVC polymers). Each segment s contribution to the overall business is shown in Appendix A. PolyOne has four strategic goals. First, is a focus on differentiating their business through custom products that are unique in the marketplace. Second, is its goal to expand globally to better serve all geographic markets and their global customers. Its third goal is to improve costs and efficiencies in its manufacturing operations, primarily through the application of LEAN principles. PolyOne s final goal is to move towards a value based posture by selling comprehensive solutions to its customers.

Industry Overview & Competitive Position

The plastic and fiber manufacturing industry utilizes monomers (created from natural gas and oil derivatives) which have been polymerized into chains to create plastic resin. This resin is used as the base for specialty plastics. A company generates revenue primarily by re-selling the plastic resin after it has added value by combining additives with the resin, this may include specialty coloring as well. The process of combining these additives is known as compounding. Plastic compounds are versatile and high performing. They have many advantages over metals, wood, rubber, and other materials and as such have replaced those materials in many applications. Plastics are used in virtually every market. Major customers include those who manufacture goods such as: packaging, building and construction, wire and cable, transportation, medical, furniture, durable goods, institutional products, electrical and electronics, adhesives, inks and coatings. There is fierce competition among companies that compound plastic and manufacture custom formulations. Also, there is a hefty amount of competition in the distribution of polymer resins as well. Distribution is heavily dependent upon location. The industry has several large competitors including: PolyOne (POL) A. Schulman (SHLM), BASF Corporation, Ferro (FOE), Cytec Industries (CYT), Lubrizol (LZ), DuPont (DD), Dow (DOW), and Huntsman Corporation (HUN). Also, there are several smaller competitors which include but are not limited to: Kraton

performance polymers Inc. (KRA). Teknor Apex, GLS Corporation (owned by PolyOne), PMC Global, Spartech (SEH), and Tekni-Plex. The plastic and fiber manufacturing industry actually contains over 1,000 companies and has combined annual revenue of about $100 billion with the top 50 companies controlling more than 80% of the market4. Demand for products made from plastic resin can vary on a yearly basis and is seasonal in many cases. Companies with comparable sales exposure and market capitalization as PolyOne (POL) include Spartech Corporation (SEH), Kraton Performance Polymers (KRA), and A. Schulman Inc. (SHLM). Among these companies revenue has declined from a peak in 2008 with a sharp drop in 2009 but has been trending upwards since then with an average 4 yr CAGR of 1.32% and a 1 year average CAGR of 22.19% as total revenue declined from $6,772 million to $6,462 million. PolyOne has created significant revenue growth over the past year. Revenue Growth A. Schulman Inc Spartech Corporation Kraton Performance Polymers Inc. PolyOne Corp. Industry (average) Ticker SHLM SEH KRA POL 2007 9.57% -2.32% 3.85% 0.79% 2.98% 2008 9.93% -3.80% 11.09% 3.50% 5.18% 2009 -55.12% -50.94% -26.65% -32.90% -41.40% 2010 4yr CAGR 1yr CAGR 19.56% -0.40% 24.32% 9.40% -8.91% 10.37% 21.17% 4.04% 26.86% 21.40% 0.00% 27.22% 17.88% -1.32% 22.19%

Industry operating margins have decreased from an average 5.94% in 2006 to 3.55% in 2010. The operating margin has been increasing since 2009. This seems to be largely the result of a decrease in commodities pricing as evidenced by the higher gross profit margins. Also, many nonprofitable customers were dropped and unused capacity was divested. PolyOne has a slightly below average gross margin but other efficiencies allow them to maintain an above average operating margin. Operating Margin A. Schulman Inc Spartech Corporation Kraton Performance Polymers Inc. PolyOne Corp.
4

Ticker SHLM SEH KRA POL

2006 4.42% 6.15% 7.25%

2007 2.94% 4.99% 1.28%

2008 2.62% 16.32% 5.96% -4.72%

2009 0.61% 2.82% 0.83% 4.78%

2010 2.51% -5.98% 11.02% 6.65%

Hoover's, Inc. (2011). Plastic & Fiber Manufacturing - Industry Overview. Retrieved July 1, 2011, from Hoover's: http://0-subscriber.hoovers.com.helin.uri.edu/H/industry360/overview.html?industryId=1090

Industry (average) Gross Profit Margin A. Schulman Inc Spartech Corporation Kraton Performance Polymers Inc. PolyOne Corp. Industry (average) Ticker SHLM SEH KRA POL

5.94% 2006 13.61% 11.88% 12.95% 12.81%

3.07% 2007 11.91% 11.27% 11.56% 11.58%

-3.11% 2008 11.91% 9.00% 20.78% 10.83% 13.13%

2.26% 2009 13.29% 12.55% 18.13% 16.52% 15.12%

3.55% 2010 14.64% 10.62% 24.46% 16.36% 16.52%

The plastic industry is continually growing in Asia and Latin America but the European and American markets have been through a period of shrinking demand. While market growth in Asia faltered as the financial crisis hit in 2008, the industry continued to expand through 2009, and grew very strongly during 2010. Output of compounds is believed to have been close to 11 million tons for 2010. Compounding demand has also grown strongly in Latin America with 2010 growth achieving nearly 7%5. Companies with international exposure will stand to benefit from the growth in the BRIC countries.

Financial Analysis
Cash Position PolyOne was able to grow its cash position in the first quarter of 2011 by $34.3 million, which increased its total cash position from $378 million in the fourth quarter of 2010 to $412 million in the first quarter of 2011. This strong cash position has provided PolyOne with a current ratio of 2.16 and a quick ratio of 1.67. PolyOne was able to utilize a portion of this cash position to reduce its long term debt obligation by $20 million in the first quarter. In addition to its $412 million cash position, the company also had $382 million in receivables, $237.9 million in inventories, and $58.3 million in other current assets, which increased its total current assets to $1.091 billion. This strong cash position should help PolyOne to pay down debt, to make investments that will generate higher earnings, and to provide consistent divided payments to shareholders.

Plastic World. (2011, May 13). Changes in compounding industry in Europe, South America, and Asia. Retrieved July 9, 2011, from Plastic Industry News: http://www.plast-world.com/news_detail.php?id=2356

Earnings In the first quarter of 2011, PolyOne was able realize net income of $110.2 million on revenues of $718.5 million; this is an improvement over the fourth quarter of 2010, when the company generated $97.5 million in net income on revenues of $617.8 million. PolyOne has been effective in controlling fixed costs and expenses in its operations, which has helped the company to realize a gross margin of 16.43% and a net margin of 6.2%. Also, PolyOne has been able to limit its SG&A expenses over the last year with expenses being $73.9 million in the first quarter of 2010, $73 million in the second quarter of 2010, $77.1 million in the third quarter of 2010, $72.6 million in the fourth quarter of 2010, and $76.8 million in the first quarter of 2011. PolyOne s focus on expense and cost control should allow the company to maintain strong profit margins and to deliver consistent returns to shareholders for several years going forward6. Balance Sheet PolyOne has effectively utilized its assets and equity to generate income, which is evident in its return on assets of 10.85%, its return on equity of 38.28% and its total asset turnover of 1.75. In addition, PolyOne has used a combination of both debt and equity to build its current operations, with its total debt to total equity ratio at 87.77. By using a combination of debt and equity financing to finance future growth, PolyOne can ensure that it will continue to generate income without diluting the returns to existing shareholders. In addition, PolyOne should be able to reduce its long-term debt position of $453 million over the next few years, which would help the company to reduce expenses and increase profitability going forward7.

Financial Projections
As a manufacturer of the basic compounds involved in the production of plastics, PolyOne s financial outlook can fluctuate with global aggregate demand. However, when looking at the company s financial documents
6

ValueLine. (2011). PolyOne Corp. Retrieved July 7, 2011, from ValueLine: http://0www3.valueline.com.helin.uri.edu/secure/vlispdf/stk1800/vlispdf/f14960.pdf 7 Mergent Horizon. (2011). Mergent Horizon - PolyOne Corporation Overview. Retrieved July 7, 2011, from Mergent Horizon: http://0-www.mergenthorizon.com.helin.uri.edu/rp/xa/rsch/company?id=256395

and information presented in its 10K, it is possible to make relatively safe assumptions based on the past performance of the company. On an additional note, it is important to recognize that the company s performance measures have been affected by several decisions regarding mergers and divestitures with other firms. In the financial projections below, several assumptions were made. First, all supposed changes where based off of percentage changes from 20072010. The average of these percentage changes was calculated and then used to extrapolate the projected figures for 2011 and 2012. Second, it was estimated that the company will incur no goodwill costs for the projected years of 2011 and 2012. This was done because there was no way to calculate percentages in order to project the proper amounts. Third, Interest Expense and Premiums on Long-Term debt were projected to remain constant throughout 2011 and 2012. Lastly, tax benefits will be equal to those realized by the company in 2009, because this is implied by the 10K to be a standard return. In analyzing the company s potential financial performance, it is easy to notice several trends, the first of which is the high revenue volatility of the industry. When dealing with manufacturing, sales can fluctuate greatly depending on the overall economic health of the market. This is apparent in the decrease in sales from 2008 to 2009, which the company blames in its 10K on a nearly 20% decline in volume as a result of the global recession in nearly all end markets, especially transportation and building and construction. However, these sales figures were offset by lower raw material costs as well as the realization of restructuring savings in 2009. When moving forward into 2010, it is apparent that the global economic rebound had a dramatic impact on the company. Sales in 2010 increased by 27%, boosting the money flowing into PolyOne, while the company was able to simultaneously continue to realize savings on the new, leaner production and distribution processes resulting from mergers dating back to 2008. In addition to helping PolyOne s bottom line, the resulting surge in operation efficiencies enabled shareholders to gain an average of $0.54 per share in 2009 despite lower sales, while providing an average gain of $1.75 in 2010 when sales returned to a more traditional level.

Moving forward, it is plausible to project PolyOne to continue to incrementally increase its sales while at the same time continuing a controlled and efficient operating structure that will allow the company to achieve significant gains despite the incredible volatility of the global economy. In doing so, the company will continue to pass along these results to its shareholders who will continue to reap significant gains on shares of company stock (see Appendices C, D, & F for projections).

Investment Risks
Because our price target is based on future projections of PolyOne s performance, the investment risks considered are those that pertain to plausible situations whereby PolyOne s financial performance is negatively impacted. Primary Risk: Lower than Expected Polymer Demand The demand for polymers is a derived demand, dependent on the demand for plastics (particularly thermoplastics). Should the overall economy continue to remain weak, or eco-friendly policies reduce the amount of packaging consumed on products, the polymer industry could see lower than expected growth. PolyOne mitigates the impact of this risk by aggressively targeting specialized solutions to large-scale customers of polymers, which enables company-specific revenue growth even in an environment where industry revenue is falling. Secondary Risk: Raw Materials Sourcing & Energy Prices Because monomers are the base material needed to construct polymers, PolyOne could be substantially impacted should a major supplier suffer a setback such as a plant explosion, new regulatory compliance burdens, or significantly higher energy costs. An inability for PolyOne to source raw materials on time and in appropriate quantities could cause increased delays and lag times, and potentially a loss of customers and subsequent revenue shortfalls. As energy prices are a primary determinant in the price of monomers, and PolyOne has little pass-through capability in the face of slack demand, a coupling of Primary & Secondary risks factors could be disastrous for PolyOne s financial performance. PolyOne may be able to diminish this risk through appropriate hedging and sourcing

contracts, but catastrophic shortages in supply from exogenous factors cannot be entirely mitigated8. Tertiary Risk: Foreign Operations Risk PolyOne operates several business units in a number of countries. Suppliers, customers, R&D labs, sales and administrative offices are all scattered on continents throughout the globe. This exposes PolyOne to foreign operations risk, including but not limited to currency fluctuations, tariffs & export bans, licensing fees, regulatory burdens, and political corruption in favor of competitors.

PolyOne Corporation. (2011). Annual report & Proxy Statemetn. Retrieved July 9, 2011, from PolyOne Corporate Website: http://www.polyone.com/en-us/investors/Pages/AnnualReport.aspx

Appendix A: Revenue Breakdown

Appendix B: Compounder Rankings

Appendix C: Income Statement & Balance Sheet

Income Statement
(Source: SEC Edgar website)

History Income Statement Sales Revenues Cost of Goods Sold Deprec iation Gross Inc ome Selling, General & Admin Expenses Operating Inc ome Other (inc ome) or expense Earnings Before Interest And Taxes (EBIT) Interest Expense On Debt Pretax Inc ome Inc omeTaxes Net Inc ome Dividends Retained earnings

Historical Scale 1,000,000 2007 2008 2,642.7 2,738.7 2,286.3 2,330.2 57.4 68.0 299.0 340.5 241.2 57.8 40.4 17.4 49.8 -32.4 -43.8 11.4 0 11.4 275.5 65.0 195.5 -130.5 40.6 -171.1 101.8 -272.9 0 -272.9 Historical

2009 2,060.7 1,643.2 64.8 352.7 291.1 61.6 -30.4 92.0 37.5 54.5 -13.3 67.8 0 67.8

2010 2621.9 2136.7 55.2 430.0 295.8 134.2 -11.2 145.4 34.4 111.0 -51.6 162.6 0.0 162.6

2011 3015.2 2412.1 65.1 537.9 320.9 217.0 15.0 202.0 36.6 165.4 57.9 107.5 2.2 105.4

Forecast 2012 3286.6 2629.2 70.1 587.2 332.2 260.4 18.0 242.4 37.8 204.6 71.6 133.0 2.7 128.7

2013 3582.3 2865.9 75.4 641.1 343.8 297.3 21.6 275.7 39.0 236.7 82.8 153.8 3.1 146.1

Balance Sheet
Assets Cash Ac c ounts Rec eivable Inventories Other Current Assets Deferred inc ome taxes Total Current Assets

(Source: SEC Edgar website)

5 Yr History Balance Sheet

Scale 2007

1,000,000 2008

2009

2010

2011

Forecast 2012

2013

79.4 340.8 223.4 40.2 0.0 683.8 1215.7 766.0 449.7 315.4 134.1 1583.0

44.3 262.1 197.8 20.9 0.0 525.1 1231.3 799.3 432.0 281.5 39.1 1277.7

222.7 282.5 159.6 29.9 0.0 694.7 1234.2 841.8 392.4 264.5 40.3 1391.9

378.1 294.5 211.3 55.1 0.0 939.0 1243.2 868.8 374.4 234.6 123.9 1671.9

273.1 301.5 260.5 44.0 0.0 879.1 1386.2 933.9 452.3 244.6 150.8 1726.7

318.0 394.4 265.7 48.0 0.0 1026.0 1557.3 1004.0 493.0 232.4 164.3 1915.7

358.8 429.9 271.0 52.3 0.0 1117.0 1675.4 1066.4 537.4 220.8 179.1 2125.9

Gross Property Plant & Equipment Less: Ac c umulated Deprec iation Net Property Plant and Equipment Intangible Assets Other Assets Total Assets Liabilities Ac c ounts Payable Short Term Debt Inc ome Taxes Payable Other Current Liabilities Total Current Liabilities Long Term Debt Exc luding Capitalized Leases Deferred Taxes - Credit Other liabilities Total Liabilities Shareholders' Equity Common Stoc k Additional paid-in-c apital Retained Earnings Other Comprehensive Inc ome Total Liabilities & Shareholders' Equity

250.5 28.7 2.8 91.6 373.6 308.0 0.0 251.7 933.3

160.0 26.0 5.0 113.2 304.2 408.3 0.0 389.1 1101.6

238.3 20.4 7.8 109.2 375.7 389.2 0.0 293.4 1058.3

269.0 20.0 17.1 128.7 434.8 432.9 0.0 288.2 1155.9

271.4 24.9 9.9 134.4 440.7 402.9 0.0 271.4 1114.9

295.8 27.2 10.8 140.4 474.2 415.0 0.0 295.8 1185.0

322.4 29.6 11.8 146.7 510.5 427.4 0.0 322.4 1260.4

1.2 1065.0 -48.5 -368.3 1583.0

1.2 1065.0 -321.4 -568.9 1277.7

1.2 1065.5 -253.6 -479.5 1391.9

1.2 1059.4 -66.9 -477.7 1671.9

1.2 1059.4 38.5 - 487.3 1726.7

1.2 1059.4 167.1 -497.0 1915.7

1.2 1059.4 311.9 -506.9 2125.9

Appendix D: Free Cash Flows

Net i e available t common shareholders Pl s: Net noncash charges Pl s: Interest expense x (1 - tax rate) Less: Investment in Fixed Capital Less: Investment in Working Capital Free C Fl w t t e Firm 11.4 57.4 32.4 52.0 -54.9 -272.9 68.0 26.4 -112.7 24.5 -90.3 67.8 64.8 24.4 -38.4 -100.7 296.1

104.1

Valu of th Firm
Free Cash Flow Terminal Value Total Cash Flow Present Value of Cash Flows Add in initial year cash and marketable securities Ent rpris Valu (in millions) Less value of firm's debt Equity Valu

$2,404.64 79.40 2,484.04 764.90 $1,719.14 93.39 $ 18.41

Shares outstanding (in millions)

Share value plus expected 12 month price appreciation Less projected dividend 12 month pri targ t

EPS

0)

('

'&

re v l e

22.25 0.00

22.25

1.13

 



 

Free C s

Fl w

e Fir

(see S

we p.

3 )

Fore 2011 226.9 65.1 23.8 104.7 32.2 178.8 162.6 55.2 22.4 65.6 17.8 156.8

2012

133.0 70.1 24.6 54.3 -24.4 197.7

0
156.76 156.76

1
178.75 178.75

197.74 197.74


s

% %

2013 153.8 75.4 25.4 59.2 -26.7 222.1

# $ $ # "! %

 

3
222.08 2,610.22 2,832.31

Appendix E: P/E Valuation & WACC

P/E valuation example:
POL Pric Hi
2006 2007 2010 9. 9 9.29 13.99

6. 5.93 6.93

. 0.12 1.69

. 25.95 27.23

6. 9 19.00 16.15

1. 0.82 1.57

.98 30. 1 15.55

19.11 14.41 6.06

1. 1.05 -1.63

POL P/E Hi
2006 2007 2010 7.44 77.42 8.28

Lo
4.74 49.42 4.10

S LM P/E Hi
24.14 31.65 17.34

Lo
15.41 23.17 10.29

SEH P/E Hi
23.32 29.25 0.00

Lo
15.93 13.72 0.00

FOE P/E Hi
49.32 0.00 62.12

Industr av rag P/E Hi Lo

2006 2007 2010 25.76 27.66 21.61 16.10 17.26 10.04

POL R l tiv P/E

Hi
2006 2007 2010 Av

Lo
0.29 2.86 0.41

0.29 2.80 0.38

g R l tiv P/E 1.16 1.19

Proj

t d P/E for POL b

Lo Mid

d on l

ty

r of indu try v rag

Hi

24.99

11.94

18.47

Valu lin forecast of POL's 2011 EPS $ 1.15

Target price range

Hi Lo

28.74

13.73

Mid point 21.24

Recent price 15.74

Expected return 34.9%

Required return

r_

WACC
Inputs: Market risk premium Firm beta Risk-free rate Market value of outstanding equity: Shares (millions) Price per share Required return on equity

Market value of outstanding debt Required return on debt

Computation of WACC: Weight of equity Weight of debt Tax rate WACC

a `Y

rf mr bet

3.0% 7.0% 2.55 20.9%

Expected alpha 14.1%

7/1/2011

7.00% 2.55 3.00% 516 93.39 15.74 20.85%

1,155.90 10.65%

30.86% 69.14% 35.00% 11.22%

DE A

WT T V W

VT WV

TWV

@9

Lo

PS

Lo

PS

Lo

PS

Lo
13.82 17.37 6.68

1. 26.03 15.53

0. -2.23 0.25

Lo
31.41 0.00 26.72

CC7
PS

DA7

ED7

S LM Pric Hi

Pric Hi

OE Pric Hi

1 655
Pric Hi
866.25 547.50 24.75

E EA 1 23

C @ 89 BA 1 2

99 @7

T UT Q S Q Q SRQ

H H G

I PI

X X

Lo
459.00 151.00 11.11

GGC P/E Hi
24.57 0.00 20.29

Lo
13.02 0.00 9.11

Appendix F: Assumptions
Assumptions: y y y y y y y y y y y y y y y Sales will increase the first year by 15%, then 9% thereafter due to Brazil acquisition in 2010 COGS was an average of 80% of sales SG&A will increase 8.5% the first year, then 3.5% thereafter (average from Annual Report) due to the Brazil acquisition in 2010 Other income/expenses increase significantly the first year, then steadily thereafter due to acquisition costs, etc. that will occur in 2011 Use a 7.5% L-T interest rate and 4.75% S-T interest rate (right from Annual Report) Tax rate was 35% (Annual Report) Company has decided to begin to payout dividends in 2011 (2% payout ratio yahoo finance) Calculated Accounts Receivable as a % of sales - 10% - 12% historically Calculated Inventory as a % of sales - 2% historically (first year more due to acquisition) Calculated Other Current Assets as a % of sales - 1% historically Calculated PPE as a % of sales - 15% historically Calculated Accounts Payable as a % of sales - 9% historically Calculated S-T debt as a % of sales - 1% historically Decreased Debt significantly as they retired 40 million in 2010, but incurred a little during acquisition (3% growth rate after that) Calculated Other Liabilities as an % of sales - 9% historically

Disclosures
Ownership and material conflicts of interest: None of the authors, or members of their households, of this report holds a financial interest in the securities of this company or knows of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Market making: The author(s) does not act as a market marker in the subject company s securities. Ratings key: Banks rate companies as either a BUY, HOLD, or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the next twelve month period, and recommends that investors take a position above the security s weight in the S&P 500, or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security.